Accrued Interest and Dirty Price Explained
Every bond has a quoted price (the clean price) and an actual settlement price (the dirty price). The difference is accrued interest — the portion of the next coupon that the seller has already earned. This article explains exactly what it is, how to calculate it, and why it matters when you buy or sell a bond in the secondary market.
Why two prices exist
A bond pays coupons at fixed intervals — every six months for most G-Secs and PSU bonds, every quarter or month for many NCDs. Between coupon payment dates, interest accumulates on a daily basis. When you sell a bond between coupons, you are transferring a stream of future payments to the buyer. But you have already earned part of the next coupon — the seller is entitled to that compensation.
To handle this cleanly, bond markets separate the two components:
- Clean price: The bond's market price, excluding accrued interest. This is what you see quoted on exchanges and data platforms (including this one).
- Dirty price (full price): What you actually pay to settle the transaction. Dirty price = clean price + accrued interest.
Quoting clean prices is a convention that makes comparing bonds across different points in their coupon cycle easier. If prices included accrued interest, the quoted price would jump lower immediately after each coupon payment, making price charts noisy and comparisons across bonds confusing.
How to calculate accrued interest
The formula is straightforward:
Accrued interest = Face value × (Coupon rate / Coupon frequency) × (Days since last coupon / Days in coupon period)
The tricky part is how you count the days — and this depends on the day count convention the bond uses.
Day count conventions in India
| Convention | Used for | How days are counted |
|---|---|---|
| 30/360 | Central G-Secs, SDLs, most PSU bonds | Each month treated as 30 days; year as 360 days |
| Actual/365 | Most corporate NCDs, bank bonds | Actual calendar days elapsed / 365 |
| Actual/Actual | Some international bonds, rare in India | Actual days / actual days in coupon period |
FIMMDA (Fixed Income Money Market and Derivatives Association of India) publishes the standard: Indian dated G-Secs use the 30/360 convention.
A worked example
Consider the 7.18% G-Sec 2033. Suppose its semi-annual coupon dates are 24 January and 24 July each year. You buy the bond on 10 April 2026.
- Last coupon paid: 24 January 2026
- Days since last coupon (30/360): Jan has 30 days in 30/360, so from 24 Jan to 10 Apr = 6 days remaining in January + 30 (Feb) + 30 (Mar) + 10 (Apr) = 76 days
- Days in coupon period (30/360): 180 days (6 months × 30)
- Coupon per ₹100 face value: ₹7.18 / 2 = ₹3.59
- Accrued interest = ₹3.59 × (76 / 180) = ₹1.5165 per ₹100 face value
If the clean price on that day is ₹102.50, you would actually pay ₹102.50 + ₹1.52 = ₹104.02 per ₹100 face value (the dirty price). On 24 July, you receive the full coupon of ₹3.59 — which includes the ₹1.52 you paid at purchase plus ₹2.07 you earned from 10 April to 24 July.
How accrued interest affects YTM calculations
YTM (Yield to Maturity) is calculated on the dirty price, not the clean price. This is because YTM models the total cash flow: you pay the dirty price today and receive all future coupons plus face value at maturity. Using the clean price would give you a distorted yield that ignores the accrued interest component you paid.
This is why two bonds with the same coupon and maturity can show different YTMs on different days — the dirty price changes daily as accrued interest accumulates, while the clean price moves with market supply and demand.
Accrued interest and taxation
When you receive a coupon payment that includes accrued interest you paid at purchase, the full coupon is generally taxable as interest income in India. The accrued interest you paid is not automatically deducted for tax purposes (unlike some international markets). Consult a chartered accountant about how to handle this in your specific situation, particularly if you are buying bonds at different points in the coupon cycle.
For listed bonds, TDS may be deducted on coupon payments at source. The TDS rate and applicability depend on the bond type and your residency status.
What this means when you screen bonds
When you compare bonds on a screener (including RetailBonds.in), the YTM shown is calculated using the most recent traded price. That traded price reflects market dynamics and may implicitly include accrued interest in how it is reported from exchanges — depending on whether the exchange reports clean or dirty prices.
BSE typically reports the clean price (also called the weighted average clean price) for secondary market transactions. The accrued interest is added at settlement. So a bond shown at a clean price of ₹98 may settle at ₹99.50 or more, depending on how far the coupon cycle has progressed.
This is one reason why comparing bonds purely by clean price or yield-to-maturity figures from different sources can give slightly different results — different sources may use different day count conventions, settlement dates, or price conventions. RetailBonds.in shows the price and YTM as reported from BSE secondary market data, sourced from the exchange's BSECD dataset.
Key takeaways
- Clean price is the market quote. Dirty price (clean + accrued interest) is what you actually pay.
- Accrued interest compensates the seller for the coupon days they held the bond since the last payment.
- The calculation depends on the day count convention — 30/360 for G-Secs, Actual/365 for most NCDs.
- YTM is always computed on the dirty price.
- The tax treatment of coupon payments that include accrued interest requires careful attention. Consult a CA.